Intel falls shy of views; revenue flat

updateChipmaker Intel on Tuesday reported third-quarter earnings that fell shy of analysts' expectations, with revenue flat year over year.

The Santa Clara, Calif.-based company reported a net profit of $686 million, or 10 cents per share, for the quarter ending Sept. 28. Intel earned $106 million, or 2 cents per share, a year ago.

Excluding charges, Intel earned a pro forma profit of $768 million, or 11 cents per share. Analysts were expecting the company to report a profit of 13 cents per share, according to a survey by First Call.

Revenue for the quarter was flat year over year, at $6.5 billion. Revenue rose 3 percent, however, from the second quarter's $6.3 billion. Intel met its revenue targets, hitting the midpoint of predictions given to the analyst community during the quarter.

Intel cut business costs and gained market share in desktop processors during the quarter, but it's still waiting for the other shoe--the economic one--to drop.

"We expect revenue in the fourth quarter to be between $6.5 billion and $6.9 billion," Andy Bryant, Intel's CFO, said during a conference call with analysts. That means sales will be "flat to up (by) 6 percent sequentially and at the low end of seasonal patterns for the quarter."

During the past few years, sales have seen growth of between about 6 percent and about 13 percent, Bryant said.

The relatively dour outlook reflects Intel's thinking about the PC market and the economy in general in the United States, Europe and Japan. While Intel increased its shipments of PC processors and chipsets during the quarter, it saw shipments of notebook chips remain flat and shipments of server chips decline, Paul Otellini, Intel's president, said during the call.

"We continue to executive well on a number of fronts and had solid market share gains in our Intel Architecture business," Otellini said. The architecture business includes PC processors and chipsets. "We remain on track to bring out a 3GHz Pentium 4 processor next month that will bring hyperthreading to the desktop."

Hyperthreading lets a single chip act more like two, according to Intel. The company has said the technology can boost processor performance up to 25 percent.

A new Intel Xeon MP server chip, dubbed Gallatin, will also debut during the quarter, Otellini said, offering faster processor speeds for servers with more than four processors.

Waiting for corporate cooperation
Although they look good on the surface, Intel's desktop shipment increases came mainly against rival Advanced Micro Devices in the consumer market, Otellini admitted.

The chipmaker is still counting on an upswing in business spending for a return to the spectacular profitability it has enjoyed in past years.

Most analysts predict a gradual return in corporate spending in 2003, but the chipmaker isn't holding its breath.

When it comes to notebook chips, for example, "The majority of the notebook market tends to be corporate purchases. It's really speculative at this point (to determine) when that will recover," Otellini said.

Overall, because Intel sold a larger percentage of less-expensive desktop chips during the quarter, its average selling price declined slightly. That lower average selling price conspired with somewhat higher than expected manufacturing costs for materials, labor and underutilized factory capacity, to hold down profitability during the quarter, according to Intel executives.

Intel continues to cut costs to keep profits healthy. Under a previously announced plan, the company will reduce its headcount by 4,000 by the end of the year. It will also further decrease capital expenditures during 2002, from $5 billion to $4.7 billion, thanks in part to its ability to re-use some chipmaking equipment. Intel will also selectively reduce capacity during the third quarter and reduce its inventory of processors as well, Bryant said.

"If you look at our overall business in (the third quarter), think about what's happening in the company," Bryant said. "ASPs were down; units were up. What you're seeing is a situation...where we're just not seeing the demand pickup we'd like, and we hit the wall on cost savings."

Ultimately, if sales don't improve, the chipmaker will have to consider more drastic measures, such as the possibility of closing older factories, Bryant said.

"If you believe demand will stay soft for the next 12 months and factories will remain empty, we won't make our cost targets," Bryant said.

The decision to close factories is a difficult one, because it's relatively inexpensive to transition an older factory to a new manufacturing process. Intel's newest factories are the ones producing its Pentium 4 and Xeon chips. It's the older ones that might be used for communications gear or other less popular products that are underutilized, Bryant said.

Shutting down those plants might save some cash, if the market stays flat.

But it can "limit your ability to respond to an increase in demands," Bryant said. "You actually hand your competitor sales if you don't have the capability in place."

Intel shares rose just over 9 percent, to $16.42, on Tuesday before third-quarter results were announced. Following the announcement, shares fell in after-hours trading by just over $2, or 13 percent, according to Island ECN.